Entrepreneurship and Small Business Management Chapter 8 Pricing and Credit Strategies.

Entrepreneurship and Small Business Management

Chapter 8 Pricing and Credit Strategies

© 2012 Pearson Education, Upper Saddle River, NJ 07458.

All Rights Reserved.2

Entrepreneurship and Small Business Management, 1/eBy Steve Mariotti and Caroline Glackin

Ch. 8 Performance Objectives Understand the relationship between

price and overall strategy. Describe various pricing strategies. Calculate markups from manufacturer

through the consumer. Explore the role of trade credit in

pricing. Consider discounts, incentives, and

other price adjustments.




Relationship Between Price and Overall Strategy The price helps to position the

product/service in the market. The pricing strategy should reflect

the company’s overall strategy. A low price is not always better;

consumers may make quality judgments based on the price.




Steps to Better Pricing1. Assess what value your customers

place on the product/service.2. Look for variations in the way

customers value the product/service.3. Assess customers’ price sensitivity.4. Identify an optimal pricing structure.5. Consider competitors’ reactions.




Steps to Better Pricing(continued)

6. Monitor prices realized at the transaction level.

7. Assess customers’ emotional response.

8. Analyze whether the returns are worth the cost to serve.




Pricing Strategies Value pricing—offer more for less cost Prestige pricing—set a high price to

convey high quality or uniqueness Cost-plus pricing—use your cost plus

a desired profit margin Markup pricing—apply a predetermined

percentage to the product’s cost Penetration pricing—charge a lower

initial price to capture market share




Pricing Strategies(continued) Skimming price—charge a higher initial

price while there are few competitors Meet-or-beat-the-competition pricing—

match or undercut competitors’ prices Follow-the-leader pricing—use a

particular competitor (usually the dominate one in the industry) as the model for pricing




Pricing Strategies(continued) Personalized (dynamic) pricing—

charge certain customers a premium over the standard price

Variable pricing—use different prices for the same product or service (to allow for discounts, credit terms, price concessions)

Price lining—create a range of distinctive pricing levels




Common Use of Pricing Strategiesby Business TypePricing Strategy Mfg. Wholesal

eRetail Service

Cost-Plus X X X X

Follow-the-Leader X X X

Meet-or-Beat-the -Competition

X X X X

Penetration X X

Personalized X X

Prestige X X

Skimming X X

Value X X

Variable X X




Calculating Markups Manufacturers and retailers often

double (keystone) their cost.

Wholesalers often operate on smaller margins.

Service businesses may use cost plus a mark-up on hourly labor rates and materials costs.




Example Chain of Markups




Pricing by Service Businesses Primary “product” cost is labor

Other pricing factors include: Competitive environment Cost of materials used to deliver the

service Overhead costs Desired profit levels




Service Business:Calculating Cost Per Hour

Fixed Costs + Variable Costs – Materials

Hours




Service Business:Pricing Example

Cost of Services(15 hours x $95.50/hr.)

Cost of Materials

Cost of Materials Markup (70%)

Total Service Price

$1,432.50

200.00

140.00

$1,772.50




Demand Affects Pricing Market clearing price—point at

which supply of product matches demand

Flexibility of pricing depends on the demand elasticity of your customers: Elastic—demand changes significantly

up or down when the price changes Inelastic—demand does not change

much when the price changes




Extending Credit to CustomersPros Raises revenues and

promotes business growth; product or service is accessible to many more people

Reduces the loss of customers to competitors who offer credit

Cons Slower cash flow Risk of unpaid loans Start-up and ongoing

fees Additional

management processes required to approve and maintain credit accounts




Types of Credit Store or merchant credit cards Installment credit:

Loan is paid back, with interest, over a specified time period in installments

Purchased item serves as collateral Trade credit:

Cash-in-advance (COA) terms Cash-on-delivery (COD) terms




Types of Price Adjustments Order size

(quantity) discounts Annual, quarterly,

or monthly volume discounts/bonuses

Dealer and distributor discounts

Promotion discounts and bonuses

Merchandising discounts

Co-op advertising and marketing allowances

Product rebates Exception discounts Freight/shipping

allowances




Price Adjustment Analysis Pocket price—what remains after all

pricing factors, such as discounts and allowances, are deducted from the list or invoice price to reach the final price

Pocket price band—range of prices for a given unit volume of a particular item at a given point in time

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Entrepreneurship and Small Business Management Chapter 8 Pricing and Credit Strategies.

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